Writing off losses against profit

WJ writes: I run a small engineering company and want to acquire another business, which is now making a loss, that I think I could turn round in two years. I am hoping to offset the target company´s accumulated losses against the profits of my own company or against the profits of the business I am buying. Can this be done?

Answer

You will not be able to use any of the accumulated losses of the target business against the profits of your own company. However, as the proposal is for a new, wholly owned subsidiary, which is likely to make losses for a further two years, you will be able to surrender these losses against any future profits of your own company under group relief rules. You must ensure that the losses brought forward can be used against future profits of the business you are acquiring. Section 768 of the Finance Act 1991 states that where there is a change in ownership of the company, combined with a big change in the conduct of its trade, then losses incurred in an accounting period before the change of ownership cannot be set against profits in the accounting period after the change of ownership. You need to ensure that the changes you are making improve the efficiency and development of the existing business rather than alter the nature of its trade, as this could put these losses at risk.